Think back to the days when Gunsmoke was the favorite television show and President Lyndon Johnson rules the United States. Those were different times. Back then the US economy was able to march ahead by almost 5% a year – not just for one year but for an entire decade. We would give just about anything to see those numbers again – to regain some of that power!
Two decades later during the presidency of Ronald Reagan, the post-World War II era downturn, which was the worst ever seen ended and the economic cycle began to rise once again, averaging slightly over 4% a year. The rebound from the recession had occurred by the time George W. Bush made it to the White House, and was delivering an average growth rate of under 3%.
Are you wondering just what the bounce looks like now? In the seven years since the Great Recession ended under President Obama’s time in office, the annual growth has averaged 2%.
What is on the horizon?
So what’s the best news? Unless business and government do something to improve the economy’s underlying capability, the United States will be lucky to achieve even that paltry growth rate over any sustained period of time.
The recurring tailwind was bolstered when idle resources were put back to work, bringing the unemployment rate down from 10% to 5%. The jobless rate isn’t going to fall from 5%, which economist consider near full employment with no extreme inflation.
What is left is an economy that is reliant on two prevailing dynamics. The first dynamic is a slow but steady decrease in the size of the work force. The second is an unrelenting decline in the productivity growth over the last 20 years.
Economic Cycle Research Institute (Lakshman Achuthan) sums it up like this: over the coming 5 years, the labor force growth will be 0.5% plus there will be a 0.5% productivity growth, which is going to catapult the economy ahead at the feeble pace of just 1% annually.
Experts, like John G. Fernald, who is a senior researcher at San Francisco’s Federal Reserve Bank, have the same viewpoint as the budget office – productivity will advance by approximately 1.5% a year, returning to the average pace that was seen in the 1970s, which would mean that the annual growth rate would be little more than 2%.
To a large degree, productivity has slowed because hiring power is growing at a rate that is faster than capital investment.
Government could relax restrictions on immigrants that have an education, which would increase investment and entrepreneurship. Subsidizing child care could encourage more mothers to return to work faster.
In addition, the elimination of burdensome regulations such as occupational licenses that restrict eligibility for numerous jobs and extremely difficult zoning laws that stop new homes from being built would improve the equity and efficiency of the economy.
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